TOP central banks said yesterday they stood ready to tackle any surge in inflation with tighter policy as the latest escalation in the Iran war put the Middle East’s vital energy infrastructure in the line of fire, pushing fuel prices higher.
In a rare coincidence of the monetary policy diary, central banks of the United States, Japan, Britain, Canada and the euro zone – effectively the Group of Seven (G7) nations – convened this week, as have counterparts from several emerging economies.
After facing criticism they acted too late to tame a post-Covid jump in inflation exacerbated by the Russian invasion of Ukraine in 2022, policymakers are determined to rein in prices without derailing still-patchy economic growth - and above all to avoid a “stagflation” mix of recession and price surges.
The US Federal Reserve and the Bank of Canada on Wednesday both opted to hold interest rates steady, as did the Bank of Japan, Bank of England, European Central Bank and the central banks of Switzerland and Sweden yesterday.
Yet they made clear they are on alert, wary that rising energy prices could spark a wave of inflation across the wider economy if, for example, it starts to prompt higher wage demands by households fearful of losing purchasing power.
“The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth,” the ECB said.
In her Press conference after the decision, ECB President Christine Lagarde said the euro zone was resilient and that low inflation meant it was “well positioned” to deal with what she called “a major shock that is unfolding”.
The central bank raised its forecast for inflation this year to 2.6 per cent – above its 2pc target – and released scenarios under which inflation could fall back down again if the shock proved temporary but rise to 4.8pc next year if disruption continued.
Commenting on the unanimous decision by the Bank of England’s policy-making committee to keep rates on hold, BoE Governor Andrew Bailey said the bank would have to respond to a persistent impact on UK inflation.
But he played down expectations on markets for a sharp tightening in policy as traders priced in two 25-basis-point rate hikes by year-end, up from just one prior to the meeting.
In Tokyo, Bank of Japan Governor Kazuo Ueda said the BOJ would not rule out a near-term rate hike if the expected hit to growth from surging oil costs proves temporary, and does not derail progress in durably hitting the bank’s price target.
Bank of Canada Governor Tiff Macklem struck a similar note: “If energy prices stay high, we will not let their effects broaden and become persistent inflation,” he said.
&uuid=(email))